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Saturday, September 10, 2011

Ilargi: When times get desperate, people get resourceful. And sometimes funny. Let me give you two examples. First, the Greeks. You may remember that the government in Athens had demanded not long ago that the brilliant troika debt-swap plan that was supposed to see private investors entirely voluntarily lose 21% of the value of their Greek sovereign "assets", would need a 90% subscription rate by September 9, or else (I have to admit, I was never entirely sure what the "else" would consist of).

Not to worry though. Athens now announces that it has no plans to publish any results for the plan anytime soon. That is, if possible, even more brilliant than the original plan. It's too early, Athens says:

Greece has no plans to publish details of anticipated participation in its debt-swap program this week or next, said Petros Christodoulou, head of the country’s debt management office. The response so far has been "very positive," he said in a telephone interview. "There will not be a number coming out of Athens today or next week. At this moment, more than half of the Europeans have not even responded. It is too early."

Credit-default swaps insuring Greek government bonds jumped 701 basis points to a record 3,727 basis points, according to CMA. The five-year contracts signal there’s a 94 percent probability the country won’t meet its debt commitments.

The results of the letter of inquiry, which was dated Aug. 25, will be "useful for us to plan our liability management," Christodoulou said today. It would be "totally misleading" to describe the exercise as an offer and make the expected participation percentage public, he said. "I will know the number, but I’m not about to give it to anybody. It’s not a number that means anything because it is not binding." He declined to say what percentage of owners of the nation’s outstanding bonds the program has identified.

Ilargi: Now, if you set a September 9 deadline for a plan, and haven't heard of half of the potential respondents, and moreover CDS markets signal a 94% chance that you won't repay your debt (wait, there's still a 6% chance Greece will repay?!), then perhaps don't ask don't tell is indeed the way to go. It's not like Greece has any credibility left that it needs to worry about losing.

But at the same time, these actions, hilarious as they may be, are also more nails in more coffins. Europe is fast running out of time to find a solution that would leave it with even just any token credibility. It should do what it can to try and restore some confidence where and when it can. Instead, everyone seems to be rushing for the exits at full speed and without any coherent planning, women and children be damned.

Germany is now openly preparing plans to save -ringfence- its banks if and when Greece defaults. Other countries are certainly doing the same. Times change, and fast. And just in case, you can bet they all have fresh plans on the shelf to print huge amounts of marks and francs and pesetas. And drachmas.

The problem, of course, is that the people in charge in the various eurozone countries have consistently refused to prepare for what has now become inevitable (and, for all intents and purposes, has been for years). Which means that plans and preparations we are about to see will be haphazard and poorly organized. Get ready to see some true craziness. And soon: the status quo is not going to last much longer.

Meanwhile, it's the very lack of preparedness that may guide much of the European action and reaction: extend and pretend a little longer, so you can try and get ready. Remember Jean-claude Juncker's words once more: "When it gets serious, you have to lie".

"We met at a time of new challenges to ... growth, fiscal deficits and sovereign debt ... There are now clear signs of a slowdown in global growth. We are committed to a strong and coordinated response to these challenges," a communique said after hours of talks between G7 finance ministers and central bankers.

"We reaffirmed our shared interest in a strong and stable international financial system and our support for market determined exchange rates," it said. "We will consult closely in regard to actions in exchange markets and would cooperate as appropriate."

Ilargi: A slowdown in global growth? You don't say?! And the signs are clear now? Just now? I would suggest that if you see these signs only now, chances are that any "strong and coordinated response to these challenges" will be too little too late as well.

It's exactly like what happens in the US. Obama presents yet another jobs plan, and it turns out to be largely based on tax cuts. As if the government's deficit and debt are not high enough yet. Whether tax cuts will lead to substantial employment increases is very doubtful: if private employers have no work to offer, they won't hire people to do it, tax cut or not. The hundreds of billions involved might be better spent hiring people directly in large scale infrastructure projects; I'm sure you can all think off a few roads that could do with some repair, or perhaps an electricity grid near you (hello, San Diego!).

But no, the government shouldn't be hiring, or so feel many Americans. Private business should. Which means public money gets thrown into a murky private pool from which very little if any may ever return. Hey, it’s a choice.... Just one question: who benefits?

Like others, I was preparing for a Greek default this weekend, and perhaps in combination with a federal take-over of Bank of America. The media focus on the 9/11 commemorations seemed like a perfect distraction to push a number of things through without hitting the main headlines. So far it hasn't happened. Well, we have a bit of patience left still.

But we do begin to fear the speed and severity with which the walls will come tumbling down when they inevitably do. All the time, money and effort spent to salvage a doomed and bankrupt financial and political system could be put to much better use, provided one is interested in keeping at least some basic tenets of our societies intact. The longer we keep up this charade, the harder we will fall.

Then again, that presents a huge dilemma, the essence of our human tragedy. As long as our leaders and media deny the reality of what's happening, we are all too eager to follow. We're therefore pretty much guaranteed to walk, nay run, into our own traps eyes wide open. For who wants to see this all for what it is? Who's ready for the fall?

Treasuries rose for a second straight week, pushing 10-year note yields to a record low, as Germany prepared plans to shore up its banks in the event of a Greek default, bolstering demand for a refuge.

The extra yield investors get to hold 30-year bonds instead of two-year notes was the smallest in more than a year on speculation the Federal Reserve may decide at its meeting later this month to replace some of its shorter-maturity U.S. securities with longer-term debt to lower borrowing costs. Greece rejected talk of a default as "organized speculation," according to an e-mailed statement from the finance ministry.

"Europe is crumbling," said Sean Murphy, a trader at in New York at Societe Generale SA, one of the 20 primary dealers that trade with the Fed. "If you have this global recession ahead of us and all sorts of problems over there, the flight-to-quality bid is definitely around."

Yields on 10-year notes dropped seven basis points, or 0.07 percentage point, to 1.92 percent this week, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained 19/32, or $5.94 per $1,000 face amount, to 101 27/32. The yields fell yesterday to 1.8942 percent, the lowest level in Fed data going back to 1953. The Standard & Poor’s 500 Index dropped 1.7 percent. Gold futures rose to a record $1,923.70 an ounce on Sept. 6.

Treasury ReturnsTreasuries have returned 8.5 percent in 2011 in what would be their best year since the depths of the financial crisis in 2008, according to Bank of America Merrill Lynch indexes. President Barack Obama presented to Congress on Sept. 8 a $447 billion jobs plan that would include infrastructure spending, subsidies to local governments to stem teacher layoffs and cutting in half payroll taxes paid by workers and small- business owners. Tax cuts account for more than half the plan’s dollar value.

"For the first time, the administration recognizes how deep our economic challenges are and is trying to get ahead of them," Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in an interview on Bloomberg Television’s "In the Loop" with Betty Liu. The Newport Beach, California, firm manages the biggest bond fund.

The government will sell $66 billion in notes and bonds next week. The U.S. is to offer $32 billion of three-year debt, $21 billion of 10-year securities and $13 billion of 30-year bonds in three daily auctions beginning Sept. 12. Treasuries also gained as Fed Chairman Ben S. Bernanke said Sept. 8 in a Minneapolis speech that policy makers will discuss what they may need to do to boost the recovery at a two-day meeting that begins Sept. 20.

Bernanke’s ViewPolicy makers are prepared to use the tools they have "as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said. He said in previous remarks the options include lengthening the average duration of securities in the Fed’s $1.65 trillion Treasury portfolio and buying more government bonds.

Credit-default swaps insuring Greek sovereign bonds jumped 212 basis points to a record 3,238, according to CMA. The five- year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

An emergency plan in Germany involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said three people who spoke yesterday on condition of anonymity because the deliberations are being held in private.

Buttressing BanksThe successor to the government’s bank-rescue fund introduced in 2008 may be enrolled to help recapitalize the banks, one of the people said. "Fear is driving everything right now," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia. "That’s why you’re getting this kind of jump in the market."

Greece is committed to "full implementation" of its bailout agreement, the finance ministry said in its e-mailed statement. The next government bond will mature Dec. 19 and is worth 1.2 billion euros ($1.6 billion), according to Bloomberg data. Until then, Greece faces redemptions on Treasury bills, which are typically rolled over by a group of primary dealers.

Adding to European sovereign-debt turmoil, Juergen Stark resigned yesterday from the European Central Bank’s Executive Board. During a Sept. 4 conference call, Stark expressed opposition to a bond-purchase program, which was expanded last month when the ECB started buying Italian and Spanish debt, said a euro-area bank official, who spoke on condition of anonymity because discussions are confidential.

"The growth outlook looks sour, there is no guarantee that anything else comes from the Fed, there is little willingness for more fiscal stimulus from Washington, and Europe is a mess, which make owning Treasuries a good idea, despite these yields," said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer.

Group of Seven finance ministers agreed on Friday to respond in concert to a slowdown in the global economy but produced no concrete action to calm markets spooked by signs of faltering growth and Europe's debt crisis.

"We met at a time of new challenges to ... growth, fiscal deficits and sovereign debt ... There are now clear signs of a slowdown in global growth. We are committed to a strong and coordinated response to these challenges," a communique said after hours of talks between G7 finance ministers and central bankers. "We reaffirmed our share interest in a strong and stable international financial system and our support for market determined exchange rates," it said. "We will consult closely in regard to actions in exchange markets and would cooperate as appropriate."

A German government source said talks dragged on late into the evening because France wanted a joint communiqué but others in the meeting felt there was not enough common ground to merit one. Ministers and central bankers were under pressure to calm the biggest confidence crisis in financial markets since the 2007-8 global credit crunch. But with different countries facing different problems there was no one-size-fits-all solution.

"We have to get away from the idea there is only one solution for all... It's not rigour versus growth," French finance minister Francois Baroin told a news conference.

France's top banks are bracing themselves for a likely credit rating downgrade from Moody's, sources close to the situation said on Saturday, further complicating their efforts to assure investors they are riding out the tensions in funding markets. Several sources said on Saturday that BNP Paribas , Societe Generale and Credit Agricole were expecting an "imminent" decision from the ratings agency, which first put them under review for possible downgrade on June 15.

Moody's at the time had cited French banks' exposure to Greece's debt-stricken economy as the reason behind the review, which was due to last three months. Outside commentators said the ratings were ripe for a downgrade because of rising borrowing costs in the face of sovereign debt turmoil. "The decision is imminent," one Paris-based source said. "It will probably be a downgrade but it's not certain yet."

France's lenders -- two of which own local banks in Greece -- have the highest overall bank exposure to Greece, according to the Bank for International Settlements. They have begun to take writedowns on their Greek sovereign debt holdings as part of a new rescue package but some say not aggressively enough. Greece vowed on Saturday to stay the course of austerity and avoid bankruptcy as anger at the country's failure to meet fiscal targets under its EU/IMF bailout reached boiling point.

The three French banks and Moody's declined to comment for this story. The agency said in June it was considering cutting BNP and Credit Agricole by one notch and SocGen by up to two notches because of the level of state aid it received in the past. Moody's long-term senior debt ratings for BNP, SocGen and Credit Agricole are respectively Aa2, Aa2 and Aa1, all assigning high grade creditworthiness.

A downgrade, though well-flagged, would be another reminder of deteriorating market sentiment as investors discount economic slowdown in Europe, tougher capital requirements on banks and the unfolding drama in Greece and the euro area. Sovereign debt turmoil has crushed European banks' share prices since the start of the summer and pushed up their cost of borrowing, especially from U.S. dollar money markets.

French banks, seen as particularly reliant on short-term funding, have been among the hardest hit. SocGen shares are down 57 percent since the end of June and are flirting with levels not seen since March 2009, when Europe was in recession. SocGen, Credit Agricole and larger arch-rival BNP -- which together held around 6 billion euros ($8 billion) of Greek sovereign debt at end-March -- recently sought to reassure investors on their funding positions by giving extra disclosures on liquidity, but that has failed to stem the sell-off.

Some say the only way out is for Europe to recapitalise its battered banking sector to better absorb sovereign debt losses and to cope with tougher capital requirements. IMF chief Christine Lagarde has been a vocal proponent of such a measure.

Importantly, this dour outlook has nothing to do with the company's operating businesses, which Whalen thinks are fine. In fact, says Whalen, there's no need for the bank to be restructuring them and firing thousands of employees to improve its bottom line.

The part of Bank of America that's not fine, in Whalen's view, is the ongoing liability from the mortgage underwriting that Bank of America's subsidiaries did during the housing bubble. The litigation exposure from this could be so humongous, Whalen argues, that it will bankrupt the company, forcing regulators to step in and restructure it. And Whalen doesn't think the country should wait for that day.

Instead, Whalen says, the government should just seize Bank of America and restructure its debt, equity, and legal obligations now. The company's operating businesses--branches, commercial lending, wealth management, and so forth--should continue operating, and the company could then be refloated with a new ownership structure.

This would leave Bank of America clean, lean, and competitive--just like the strengthened GM after the forced auto-company bankruptcy. But in the meantime, none of this is under discussion. Instead, says Whalen, Bank of America is rearranging chairs on the deck of the Titanic. And firing thousands of people who don't need to be fired.

Bank of America Corp. officials have discussed eliminating roughly 40,000 positions during the first wave of a restructuring that Chief Executive Brian Moynihan is expected to discuss Monday, said people familiar with the plans.

The numbers aren't final and could change. The restructuring would reduce the bank's work force over a period of years. In fact, Mr. Moynihan may not discuss a job-cut number during next week's presentation at the Barclays Capital 2011 Global Financial Services Conference in New York. He could choose instead to outline the bank's expected savings, after telling investors last month that he aims to reduce quarterly expenses by as much as $1.5 billion.

The planned personnel reductions at the largest U.S. lender by assets are part of an overhaul known as "Project New BAC," after the Charlotte, N.C., bank's ticker symbol. The 51-year-old Mr. Moynihan is trying to bolster profits amid concerns about Bank of America's exposure to the slowing U.S. economy and a slew of mortgage-related losses and lawsuits.

The bank has made several moves in the last month to solidify its finances and focus its operations. Mr. Moynihan ousted two high-ranking lieutenants this week and installed two others as co-chief operating officer. The bank sold $5 billion of preferred stock to Warren Buffett's Berkshire Hathaway Inc. and agreed to sell half its stake in a Chinese lender. It also is trying to sell a large piece of its mortgage business.

With Project New BAC, the bank hopes to make a strong statement to Wall Street about its commitment to getting leaner, these people said. Rivals such as J.P. Morgan Chase & Co., the second-largest lender in the U.S., operate with far fewer people.

Executives met Thursday in Charlotte and will gather again Friday to make final decisions on the reductions, putting the finishing touches on five months of work. Some jobs could be eliminated through attrition or hiring slowdowns; the bank also expects to save money through a reduction in redundant systems inherited from prior acquisitions. Implementation could take three years.

By late August, officials involved in project new BAC had narrowed the range of cuts in the first phase to 40,000-45,000, said one person familiar with the discussions. Those reductions would fall largely on the consumer half of the bank. The bank's top executives also discussed plans for roughly 40,000 cuts last month, said another person familiar with the situation A third person said the precise amount of the reductions won't be known until all of the changes are made, but is likely to fall within a range of 30,000 to 40,000. There are roughly 160,000 positions in the bank's consumer-related businesses, said people familiar with the situation.

Earlier, bank officials had discussed a plan that involved more than 50,000 job cuts, but that figure was pared back, one of these people said. The cutbacks come on top of 6,000 jobs already eliminated this year by the bank, including some in investment banking and trading. The bank employed 288,000 workers as of June 30. Last spring, Mr. Moynihan assigned 44 Bank of America executives to begin a review of the consumer side of the bank, as well as legal, marketing and human resources. More than 150,000 "ideas" were examined in the first phase, the company said in a memo distributed to employees last Sunday.

The second phase of Project New BAC is expected to begin in October and focus on the bank's commercial units: investment banking, trading, wealth management and corporate banking. More cuts are expected in that second wave. "I recognize this magnitude of change can be unsettling," Mr. Moynihan said in a memo distributed to employees on Sept. 1. "We will make our decisions carefully and thoughtfully."

Mike Lyons, an adviser to Mr. Moynihan who serves as global corporate-strategy planning and development executive, said in the same memo that the ideas emerging during the five-month review "tighten our expenses with our financial plan" and "make us a more contemporary, competitive company. This is exactly what we need to get out of this project." If the bank sticks with 40,000 job eliminations in the first wave of restructuring, the belt tightening would go well beyond the pruning of work forces at other financial firms. HSBC Holdings PLC, for example, plans to cut about 30,000 jobs world-wide by the end of 2013.

It also would exceed Bank of America's last big cutback, a 2008 revamp that called for 30,000 to 35,000 job cuts over three years. That move was triggered by an economic slowdown and the planned takeover of securities firm Merrill Lynch & Co. Many of the biggest U.S. banks are expected to pare head counts this fall. They have come under pressure from investors to control expenses with revenue weak and the economy softening. Bank of America's noninterest expense, which includes employment, was up 32% from a year ago in the second quarter, to $22.9 billion.

Bank of America has taken other steps this year to cut back. It shed 63 unprofitable branches in the second quarter and intends to close 750 of its roughly 5,700 branches in the next few years.

If President Obama's economic policies have had a signature flaw, it is the conceit that by pulling this or that policy lever, by spending more on this program or cutting that tax for a year, Washington can manipulate the $15 trillion U.S. economy to grow. With his speech last night to Congress, the President is giving that strategy one more government try.

This is not to say that Mr. Obama hasn't made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can't do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013.

Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we're told the projects really will be shovel-ready.

We'd like to support a plan to spur the economy, which is certainly struggling. Had Mr. Obama proposed a permanent cut in tax rates, or a major tax reform, or a moratorium on all new regulations for three years, he'd have our support. But you have to really, really believe in hope and change to think that another $300-$400 billion in new deficit spending and temporary tax cuts will do any better than the $4 trillion in debt that the Obama years have already piled up.

We've had the biggest Keynesian stimulus in decades. The new argument that the 2009 stimulus wasn't big enough isn't what we heard then. Americans were told it would create 3.5 million new jobs and unemployment would stay below 8% and be falling by 2011. It is now 9.1%. But this stimulus we are told will make all the difference. Mr. Obama spoke last night as if he is a converted tax-cutter, asking Republicans to expand and extend the payroll tax cut that expires in December for one more year. Along with tax credits for certain businesses that hire new employees, he says this will cut unemployment, and no doubt it will lead to some more hiring.

But what happens in 2013 when those tax rates expire and Mr. Obama pledges to hit thousands of those same small businesses with higher tax rates on income, capital gains and dividends? He seems to think businesses operate only in the present and will ignore the tax burdens coming at them down the road. This is the same reasoning that assumed that postponing ObamaCare's tax and regulatory burdens until 2014 would have no effect on business hiring in the meantime.

The same logic applies to Mr. Obama's claim that everything in his new proposal is "paid for." Yes, but only according to the usual 10-year Washington budget window that pushes all of the hard choices into the future, in this case after the election. So Mr. Obama gets to spend more now while promising to save later. This is also how the Administration claimed that a new $1 trillion health-care entitlement would reduce the deficit. It also means he can put more money in the pockets of dues-paying teachers unions and government workers.

The larger political subtext of Mr. Obama's speech is that if Congress doesn't pass his plan, he'll then campaign against Republicans as obstructionist. Thus his speech mantra that Congress should "pass it right away." This ignores that Mr. Obama has been the least obstructed President since LBJ in 1965 or FDR in 1933, which is how we got here.

The only priorities that a Democratic Congress blocked were cap-and-tax and union card check, and both of those would have further damaged growth and jobs. Even last December, after Republicans had retaken the House, Mr. Obama won his one-year payroll tax cut, more jobless benefits and most of what he wanted.

The unfortunate reality is that even if Republicans gave Mr. Obama everything he wanted, the impact on growth would be modest at best. Washington can most help the economy with serious spending restraint, permanent tax-rate cuts, regulatory relief and repeal of ObamaCare. What won't help growth is more temporary, targeted political conjuring.

The dismal state of the economy is the main reason many companies are reluctant to hire workers, and few executives are saying that President Obama’s jobs plan — while welcome — will change their minds any time soon.

That sentiment was echoed across numerous industries by executives in companies big and small on Friday, underscoring the challenge for the Obama administration as it tries to encourage hiring and perk up the moribund economy. The plan failed to generate any optimism on Wall Street as the Standard & Poor’s 500-stock index and the Dow Jones industrial average each fell about 2.7 percent.

As President Obama faced an uphill battle in Congress to win support even for portions of the plan, many employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved. Companies are focused on jittery consumer confidence, an unstable stock market, perceived obstacles to business expansion like government regulation and, above all, swings in demand for their products.

"You still need to have the business need to hire," said Jeffery Braverman, owner of Nutsonline, an e-commerce company in Cranford, N.J., that sells nuts and dried fruit. While a $4,000 credit could offset the cost of the company’s lowest-cost health insurance plan, he said, it would not spur him to hire someone. "Business demand is what drives hiring," he said.

Indeed, the industries that are hiring workers now — like technology and energy — are those where business is strong, in contrast to the overall economy. Administration officials and some economists, of course, say they believe the president’s plan, if adopted, could help increase demand more broadly. The proposed payroll tax cuts for individuals should spur consumer spending and in turn, prompt companies to hire more people.

But the plan also includes incentives for companies to hire more workers, including a payroll tax cut for businesses and a $4,000 tax credit for those employers that hire people who have been out of work for six months or more.

To the extent these measures could be used, many employers said they would most likely support people whom companies were planning to hire anyway. Chesapeake Energy, one of the biggest explorers of oil and gas in shale fields across the country, for example, said it had 800 positions open, and had already received tax credits for hiring the long-term unemployed. But Michael Kehs, vice president for strategic affairs and public relations, said in an e-mail that the credit "does not drive our hiring."

For others, the math just does not add up. Roger Tung, the chief executive of Concert Pharmaceuticals, said the company, a privately held biotechnology firm with 45 employees, would save $150,000 a year from the proposed corporate payroll tax deductions. But that is still not enough to cover the cost of hiring even one additional employee at the Lexington, Mass., company, Mr. Tung said, once benefits and other expenses besides salary are included. He can hire, he said, only when investors become confident again and the company can raise more money.

Economists estimated that President Obama’s plan, costing an estimated $447 billion if it were ever fully adopted, could create anywhere from 500,000 to nearly two million jobs next year. Most of those jobs would be added, economists say, as workers spend the additional take-home pay that would result from a proposed payroll tax cut for employees. As consumers increase spending, that can prompt more hiring by retailers, washing machine makers, restaurants and more.

Some of the new jobs would also probably come from measures like the proposed $35 billion to retain or hire teachers, police and firefighters, as well as $30 billion to refurbish school buildings and $50 billion to build or repair highways, railroads, transit systems and waterways. Construction workers in particular are in dire need of work, as they were among the hardest hit by the collapse of the housing market. More than a million construction workers are still looking for employment.

"There are so many trades people sitting at home waiting for jobs, and we have to turn them down because we don’t have work, " said Syed Habib, secretary of Falak Construction, a contractor in North Brunswick, N.J., that works on public projects and is hoping that the school modernization measure passes.

Some analysts said the president’s proposal to cut payroll taxes for the first $5 million of a business’s payroll taxes could give some companies a reason to hire, though mostly at the margins. In the pharmaceutical industry, for example, where tens of thousands of employees have lost jobs in the last few years, a lowered payroll tax could significantly affect labor costs, said Richard M. Gordon, a pharmaceutical industry analyst at the University of Michigan’s Ross School of Business. "So it’s a little less likely that people will be fired, and a little more likely that people will be hired in pharmaceutical companies that are doing well," Mr. Gordon said.

President Obama’s jobs plan would actually have a detrimental effect on other parts of the health care industry, some officials said. Hospitals warned that the proposals could end up crimping their hiring if the president’s programs were paid for with sharp reductions in the federal Medicare program.

Lloyd H. Dean, the chief executive of Catholic Healthcare West, a large health system that employs some 55,000 people in California, Arizona and Nevada, praised Mr. Obama’s efforts to promote job growth. But, he said in a statement, "Approximately 65 percent of the people we care for are insured through Medicare or Medicaid, and any further cuts in reimbursements from those programs will severely impact our ability to hire and retain workers."

Even some company officials among the president’s invited guests at the joint address expressed concerns about how the government could pay for such a large package. David Catalano, who helped found Modea, a digital advertising company in Blacksburg, Va., said that he was wary of the president’s pledge to ask the "wealthiest Americans and biggest corporations to pay their fair share."

His company was organized as an S Corporation, in which profits are passed through to shareholders, so it would face higher taxes under the president’s proposal, he said. He added: "My partner and I have reinvested 100 percent of the profits that our agency has made over the last five years back into the company. If the government takes a bigger share of that from me, it directly impedes my ability to grow the agency."

Perhaps the most intractable problem facing the economy right now is the plight of the long-term unemployed. More than six million people have been searching for jobs for six months or longer. But with the growing stigma that employees attach to this group of people, the president’s proposal to give employers $4,000 tax credits for hiring the long-term unemployed is likely to be a hard sell among companies.

Jen-Hsun Huang, the chief executive of the chip maker Nvidia, a Santa Clara, Calif., designer of chips for smartphones and tablets, said that because of growth in those markets, the company, which currently employs about 5,000 of its 7,000 global workers in the United States, expects to add about 20 percent more people within the next year. But he said the incentives would not influence the company’s hiring decisions. "The people we hire tend not to be out of work for six months," said Mr. Huang. Instead, he said, the company recruits recent graduates from the country’s top engineering schools. "The guys we hire are like sports stars," he said.

Lucious Plant, work force development administrator in Montgomery County, Ohio, where Dayton is the county seat, said companies were shortsighted for viewing people who had been out of work for several months as somehow inferior. Given today’s economy, he said, it was common for those who lost their jobs to stay unemployed for six months or more, and that many of those workers were highly skilled. "I think it would be very easy to have six months of unemployment and still be a top candidate," Mr. Plant said.

But more people needing work than the current business climate warrants. "If I get a $4,000 benefit for hiring you and I pay you $80,000 and you’re going to sit at your desk and do nothing because there’s nothing to do," said Marty Regalia, chief economist of the United States Chamber of Commerce, "then the businesses aren’t going to hire you."

Strains in the eurozone short-term lending markets have jumped sharply this week amid worries that the sovereign debt crisis will deepen, threatening the ability of banks to fund themselves.

The main gauge of tension in the funding markets has risen to levels last seen in April 2009 – and has leapt threefold since July – as banks hoard cash and refuse to lend to each other amid worries loans will not be repaid in a deteriorating financial climate. Strategists say the eurozone’s financial system would be close to breakdown without emergency loans from the European Central Bank, which they warn cannot last forever.

Nick Matthews, senior European economist at RBS, said: "We are at a key moment in the eurozone debt crisis. There are tensions in the financial system with still many banks having difficulties accessing the private markets for loans. These banks have to rely on the ECB as a backstop. But this is not a long-term sustainable solution."

Don Smith, economist at Icap, the broker, said: "We have seen a step-change in worries about the banking system because of the sovereign crisis in recent weeks and days. Banks are refusing to lend to each other because of worries over counterparty risk."

The extra premium eurozone banks have to pay to borrow over three months compared with risk-free overnight rates – considered a pure measure of credit risk – rose to 78 basis points on Tuesday. This spread between Eonia overnight rates and Euribor three-month rates fell back to 74bp on Thursday, but is still 10bp higher than the middle of last week. In comparison, from January to June, the spread averaged around 20 to 25bp.

Another sign of strain in the eurozone markets is the sharp rise in the amount of money banks are depositing at the ECB. This rose to €169bn on Tuesday, the highest level since August 2010. It remained at elevated levels of €166bn on Wednesday. That compares with €4.98bn on June 15. Before the financial crisis the amount of money deposited at the ECB was close to zero as banks freely lent money to other banks rather than opting for the safety of parking the cash at the central bank.

Italian banks, in particular, have struggled to access the markets in recent weeks as fears over the country’s sluggish economy and concerns over the government’s commitment to fiscal reforms have worried investors. Consequently, Italian banks have been forced to borrow more from the ECB. The amount of money Italian banks borrowed from the ECB jumped to €85bn in August, twice the amount of June, which stood at €41bn.

The total amount of loans the ECB has lent to eurozone banks stands at €438bn, with the peripheral nations of Greece, Ireland and Portugal, which have been shut out of the private markets since the start of the year, heavily reliant on central bank funds. Greek banks, for example, have €103bn in outstanding loans from the ECB, double the amount they borrowed at the end of 2010.

Prime Minister George Papandreou said he’ll fight to keep Greece in the euro and avoid a default, as resistance builds to providing more aid to the European Union’s most-indebted nation.

The government’s top priority is “to save the country from bankruptcy,” Papandreou said in a speech in the northern Greek city of Thessaloniki today. “We have taken the decision to fight to avoid a catastrophe for our country and its citizens: bankruptcy. We will remain in the euro. And this meant and means difficult decisions.”

Greek bond yields this week surged to records amid threats by European officials to withhold the loans the country needs to pay wages, pensions and bond redemptions. Police battled protesters with tear gas in Thessaloniki today as demonstrators marched against austerity measures that have cut incomes and driven unemployment to a record. Police in Athens used tear gas to disperse protesters near the Parliament building.

Papandreou spoke a day after the euro slumped to a six- month low and the yield on Greek two-year notes surged to a record 57 percent on concern the country is sliding closer to default. Divisions among EU leaders threaten to scupper a second Greek bailout plan approved in July, and German Finance Minister Wolfgang Schaeuble today reiterated a threat to withhold the next payment from the original rescue unless Greece shows it can meet the fiscal targets agreed with the EU.

Meeting Targets“If this year the recession is markedly greater than the estimates of international organisations on which the medium- term fiscal plan was based, despite that, Greece will make its fiscal targets, doing all that’s needed in this direction,” Papandreou said.

The austerity measures have deepened the three-year recession and provoked a widespread public backlash. A total of 4,500 police officers were deployed in the city to keep order as 15,000 people protested including students marching against education reforms and taxi drivers opposed new licensing rules. Police detained 94 and arrested two. Guests ran the gauntlet of protesters to reach the venue and were pelted with eggs.

The government now expects the economy to shrink 5 percent this year, worse than the June estimate of 3.8 percent from the EU and International Monetary Fund, and a deeper contraction than in the past two years. The forecast damps hopes that Greece will meet its pledge to lower its budget deficit to 7.5 percent of gross domestic product in 2011, with the government blaming the slump for a budget gap that widened 25 percent in the first seven months of the year.

Situation ‘Critical’Finance Minister Evangelos Venizelos, who on Sept. 6 promised to speed austerity measures pledged in return for the emergency loans, said today the situation was “critical” and that the next two months would be “decisive for our existence.”

The government must draft a credible 2012 budget, proceed with state asset sales and complete a voluntary debt swap by the end of October, he said. Speculation of a Greek default is aimed at the euro and it must be countered if the region is to stop the spread of the debt crisis, Venizelos said today in Thessaloniki. “If the euro zone can’t solve the Greek problem, it will show that it can’t solve its own.”

G-7 MeetingEuropean leaders came in for criticism for their handling of the region’s debt crisis at a meeting of Group of Seven finance minister in Marseille, France that ended today. “They’re moving, but I think they’re going to have to demonstrate to the world they have enough political will,” U.S. Treasury Secretary Timothy F. Geithner said in a Bloomberg Television interview “This is not a question of financial or economic capacity.”

Canadian Finance Minister Jim Flaherty said yesterday Greece may have to leave the euro if it fails to press ahead with its budget-cutting plans. The comments echoed remarks by Dutch Prime Minister Mark Rutte this week that countries breaking the region’s budget rules should face expulsion.

Germany’s Schaeuble reiterated that Greece must fulfil the conditions laid down in its adjustment program to get the next tranche of international aid due this month. “There can be no doubt” that the two are linked, Schaeuble told reporters in Marseille, France. “Everybody must stand by the agreements.”

German BanksGermany is preparing a plan to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt, three members of Chancellor Angela Merkel’s coalition said yesterday.

Fears have deepened since a scheduled quarterly review of Greece’s progress by the EU and IMF was unexpectedly suspended for 10 days last week. The cost of insuring Greek debt against default jumped 212 basis points yesterday to a record 3,238, according to CMA. The five-year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

Greece’s economy shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Athens-based Hellenic Statistical Authority said in an e-mailed statement on Sept. 8. The figure, based on constant prices and available non-seasonally adjusted data, is higher than an Aug. 12 preliminary estimate for a 6.9 percent contraction. A seasonally adjusted figure wasn’t provided.

Nine in 10 Greeks are dissatisfied with the way the government has handled the country’s economic crisis, according to a poll by researcher VPRC for Epikaira magazine on Sept. 8. Greek opposition New Democracy party’s lead over the governing Pasok party is widening, while a majority of voters don’t want early elections, according to opinion polls published last week.

Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse.

The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance. European leaders have responded with a cacophony of proposals for restoring confidence.

Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.

If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one. Other ideas, like moving to fiscal union, would require a fundamental revision of the EU’s founding treaties. And issuing Eurobonds would require a degree of political consensus that will take months, if not years, to construct.

But Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst. It is critical that leaders distinguish what must be done now from what can be left for later.

The first urgent task is for Europe to bulletproof its banks. Doubts about their stability are at the center of the storm. It is no coincidence that bank stocks were hit hardest in the recent financial crash. There are several ways to recapitalize Europe’s weak banks. The French and German governments, which have budgetary room for maneuver, can do so on their own. In the case of countries with poor fiscal positions, Europe’s rescue fund, the European Financial Stability Facility, can lend for this purpose. If still more money is required, the International Monetary Fund can create a special facility, using its own resources and matching funds put up by Asian governments and sovereign wealth funds.

The second urgent task is to create breathing space for Greece. The Greek people are making an almost superhuman effort to stabilize their finances and restructure their economy. But the government continues to miss its fiscal targets, more because of the global slowdown than through any fault of its own. This raises the danger that the EU and IMF will feel compelled to withdraw their support, leading to a disorderly debt default – and the social, political, and economic chaos that this scenario portends. In Greece itself, political and social stability are already tenuous. One poorly aimed rubber bullet might be all that is needed to turn the next street protest into an outright civil war.

Again, help can come in any number of ways. Creditors can agree to relax Greece’s fiscal targets. The limp debt exchange agreed to in July can be thrown out and replaced by one that grants the country meaningful debt relief. Other EU countries, led by France and Germany, can provide foreign aid. Those who have spoken of a Marshall Plan for Greece can put their money where their mouths are.

The third urgent task is to restart economic growth. Financial stability, throughout Europe, depends on it. Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it. Without growth, austerity will become intolerable. Here, too, the problem has several solutions. Germany can cut taxes. Better still would be coordinated fiscal stimulus across northern Europe.

But the fact of the matter is that northern European governments, constrained by domestic public opinion, remain unwilling to act. Under these circumstances, the only practical source of stimulus is the ECB. Interest rates will have to be slashed, and the ECB will have to follow up with large-scale asset purchases like those recently announced by the Swiss National Bank.

If these three urgent tasks are completed, there will be plenty of time – and much time will be needed – to contemplate radical changes like new budgetary rules, harmonization of other national policies, and a move to full fiscal union. But, as John Maynard Keynes famously quipped, "In the long run, we are all dead." European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency.

At least, it is for the euro as European officials make it clear that no more concessions for saving the currency in its present form are in the offing. If Greece wants to remain part of the single currency now it will have to pay the price, no matter how high that price is. After a tense week in Germany, with Chancellor Angela Merkel just clinging to power and with the country’s constitutional court curbing her ability to throw money at the euro-zone debt crisis, the Greeks appear to have been given an ultimatum.

Not only did Ms. Merkel admit that letting Greece into the euro was a mistake but she sent a clear message to Athens that if they want to stay within the bloc, then they will simply have to agree to the austerity measures needed to reduce the country’s budget deficit. Although the German leader pledged herself once again to the euro and the euro zone, she also issued a warning to all peripheral debtors that Germany won’t be paying their way anymore.

Cough up or get out.

If Ms. Merkel’s speech Wednesday was seen drawing a line in the sand, then so did comments by European Central Bank President Jean-Claude Trichet Thursday when he used the opportunity of a policy meeting press conference to make it clear that, despite euro-zone growth slowing down, the ECB isn’t rushing into any further interest rate cuts nor is it planning to expand its current programs of supporting key euro-zone bond markets to keep lending rates down or providing liquidity to euro-zone banks to keep many of them solvent.

In a nearly rabid performance, the ECB president was only too keen to remind his audience that the central bank was there to provide price stability not save recalcitrant debtors. In other words, both Ms. Merkel and Mr. Trichet appeared to be saying that although they are prepared to keep the euro on life support, they aren’t prepared to do any more.

This is the last thing Athens will have wanted to hear as it waits for negotiations with the so-called troika of the European Union, the ECB and the International Monetary Fund, to resume early next week. The Greek government suspended the talks a week ago after suggesting that, at best, it would only be able to meet about €1 billion of the €1.7 billion spending cuts that the troika are demanding this year to cover the country’s budget slippage.

Greek Prime Minister George Papandreou’s reluctance to squeeze the economy any more is hardly surprising given that new data show it already contracted by a massive 7.3% in the year to the second quarter. With the global economy also still slowing down, Greece is unlikely to get much help from that quarter either. So the country is being left with a stark and nasty choice. Suffer an even more acute contraction in the short term, keep the troika happy and stay in the euro, or go down what could be a much more painful, protracted and highly uncertain road of pulling out of the euro and returning to the drachma.

Borrowing, of course, would become even more prohibitively expensive but the country would at least know that it should be able to export itself back to recovery using what would be a debased currency. And Athens would once again be independent of Brussels and Frankfurt, free to pursue monetary and fiscal policies designed only for itself.

Greece has no plans to publish details of anticipated participation in its debt-swap program this week or next, said Petros Christodoulou, head of the country’s debt management office. The response so far has been "very positive," he said in a telephone interview. "There will not be a number coming out of Athens today or next week. At this moment, more than half of the Europeans have not even responded. It is too early."

Credit-default swaps insuring Greek government bonds jumped 701 basis points to a record 3,727 basis points, according to CMA. The five-year contracts signal there’s a 94 percent probability the country won’t meet its debt commitments.

The results of the letter of inquiry, which was dated Aug. 25, will be "useful for us to plan our liability management," Christodoulou said today. It would be "totally misleading" to describe the exercise as an offer and make the expected participation percentage public, he said. "I will know the number, but I’m not about to give it to anybody. It’s not a number that means anything because it is not binding." He declined to say what percentage of owners of the nation’s outstanding bonds the program has identified.

The proposed debt swap is part of a 159 billion-euro ($220 billion) European Union rescue plan agreed upon in July. Responses will be aggregated by regulators on a country-by- country basis, according to the Greek government. The inquiry letter asks bondholders to respond to their local regulators by today. "Any decision you make to participate in such a voluntary transaction should be based on the final terms of the offer memorandum and not on the terms of this inquiry," the letter says.

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a "Plan B" underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greece is "on a knife’s edge," German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, "it’s up to Greece to figure out how to get financing without the euro zone’s help," he later said in a speech to parliament.

Schaeuble travelled to a meeting of central bankers and finance ministers from the Group of Seven nations in Marseille, France, today as they face calls to boost growth amid increasing threats from Europe’s debt crisis and a slowing global recovery.

Progress ReportThe German government is awaiting the results of the Greek progress report and will decide what course of action then, a government spokesman said, speaking on customary condition of anonymity.

European bank credit risk surged to an all-time high today and stocks fell worldwide on concern that the debt crisis is escalating. German two-year yields declined to a record as investors sought a haven and Greek two-year note yields added as much as 86 basis points to 55.91 percent, a euro-era record. Credit-default swaps insuring Greek sovereign bonds jumped 212 basis points to a record 3,238, according to CMA. The five- year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

"Countries must act now and act boldly to steer their economies through this dangerous new phase of the recovery," International Monetary Fund Managing Director Christine Lagarde said in a speech in London today. "We must not underestimate the risks of a further spread of economic weakness or even a debilitating liquidity crisis," she said. "That is why action is needed urgently so banks can return to the business of financing economic activity."

Barroso MeetingMerkel, who is due to discuss the crisis with European Commission President Jose Barroso in Berlin on Sept. 12, is battling to secure a majority among her coalition bloc to push an overhaul of the European Financial Stability Facility through the lower house of parliament on Sept. 29. The changes would give the EFSF the power to buy bonds in the secondary market, raising German guarantees to 211 billion euros ($290 billion) from 123 billion euros.

Longer term, euro countries will "only preserve the common currency if there is more integration" in the European Union, Merkel said in a speech in Berlin today. The EU "won’t be able to avoid treaty change." While intensive discussions lie ahead and the path won’t be easy, policy makers "shouldn’t be afraid" of tackling the challenge, she said. Policy makers in Europe "are moving," U.S. Treasury Secretary Timothy F. Geithner said in a Bloomberg Television interview from the G-7 in Marseille. "But I think they’re going to have to demonstrate to the world they have enough political will."

It has been some time since anyone in financial markets took seriously the concept that Greece might eventually repay its debts. Outright default was priced in, and the debate moved on to how big the default would be. The July 21st Greece II bailout agreement envisaged a default equivalent to about 21 per cent for participating bonds, but in fact a default of some 50-70 per cent (if not more) on the whole debt burden – some 170 per cent of GDP – is what will eventually happen.

I haven't ever believed that a single euro cent of the €109 billion agreed in the Greece II bailout would ever change hands. Greece II was not about providing the Greeks with even more money. The point of it was to try to secure the final €50 billion of payments from the Greece I bailout of 2010.

Greece was so totally excluded from financial markets, its economy so dire, its society so unwilling to bear the austerity that would be required, that in spring this year the IMF became concerned that Greece would not have sufficient 2012 funding in place to allow the IMF, under its rules, to continue to disburse funds – IMF rules are quite strict, and the IMF has never not been repaid.

It threatened to withhold payments, which would have triggered full-blown Greek default earlier than EU policymakers had hoped. The Greece II bailout was devised so that EU policymakers could tell the IMF that it had not excuse not to continue to provide the Greece I funding.

Of course, the way it was set up no money was ever likely to change hands. Before the Greece II bailout agreement, Finland had already passed a law saying it could give no more money to Greece without collateral, and Slovakia (which hadn't even given any money to the Greece I bailout) had declared its support for this collateral concept. Once each of these countries claimed collateral (and there was never any option of them paying otherwise) it was always inevitable that other countries would call for the same – as happened, in due course, with Slovenia, Austria and the Netherlands. Other Eurozone states would be doing exactly the same were they not confident that no money from Greece II will ever change hands.

The IMF knows it's been had, and is trying to work out how to get out of the mess. The Greek economy is giving them plenty of potential excuses. The dependence of Greek banks on the ECB and the flight of Greek depositors to banks in other parts of the Eurozone (or, for those with the means, to private vaults) are well-known.

Less clear from the data, but strongly supported by anecdotal evidence, is the silent flight of Greek professionals, leaving Greece for other parts of the Eurozone because they fear that once Greece leaves / is ejected from the EU (likely to follow hard on the heels of Greek withdrawal from the euro), then they will not be permitted to move to other Member States, but they do not expect to be ejected if they are already there.

(Incidentally, if there is a wider EU breakup, this factor is liable to create huge tensions – whilst Polish immigrants in, say, Portugal, would be unlikely to be ejected immediately if free movement were abandoned, how long would the Portuguese really accept large immigrant populations, from countries from which new immigration would not be permitted, if there is high unemployment for the Portuguese?)

Professionals are also departing because of the ongoing Greek recession – and losing one's highest-value workers is not good for long-term competitiveness. I suspect that the official figures for the recession (an annual 7.3 per cent rate of contraction in the last quarter) overstate the depth. My guess is that what was already widespread and notorious tax evasion in Greece has gone totally pathological in recent months, and as companies refuse to report their profits accurately and as workers understate their incomes for tax purposes, the official GDP numbers shrink as a result.

But even if the recession is not as bad as the official figures suggest, it is still surely bad. And whether because they can't pay or they won't pay, the taxes aren't coming in. Without tax receipts, far from Greece repaying its debts, they are rising. Whatever its government says, and whatever pretence IMF and EU policymakers might like to maintain, between them the Greek economy and Greek taxpayers have decided that Greece is not paying.

We approach the final furlong. Without the Greece II bailout money, and without a miraculous turnaround in both its economic growth and its ability to garner tax receipts, Greece now has no realistic chance of making its March 2012 debt repayment - which would surely trigger a full-blown default. If the IMF loses patience first, and the Greek I bailout is not continued to the bitter end, default could come much sooner.

Germany and Holland have threatened to block rescue payments to Greece unless the country complies to the letter with bail-out terms, raising the spectre of default and a chain-reaction through southern Europe.

German finance minister Wolfgang Schauble said there will be no more money until Grecce "actually does" what it agreed to do. "I understand that there is resistance among the Greek population to austerity measures. But in the end it is up to Greece whether it can fulfil the conditions necessary for membership of the common currency. We offer no discounts," he told Deutschlandfunk. The wording has been taken as a threat to eject Greece from EMU, though is there no legal mechanism for such drastic action.

Dutch finance minister Jan Kees de Jager said the Netherlands "will not participate" in further payments to Greece unless it secures the go-ahead from the EU-IMF Troika, which left Athens abruptly last week after talks broke down. The showdown in Greece came as the European Central Bank (ECB) abandoned its push for higher interest rates and slashed growth forecasts for the next two years, warning that the situtation is "extraordinarily demanding" and that "downside risks" have intensified.

"The hiking cycle has been aborted," said Carsten Brzeski from ING, adding that rates may even be cut from 1.5pc if the economy worsens and deflations rears its ugly head. Jennifer McKeown, at Capital Economics, said the ECB will have to cut rates twice over the next six months as the global downturn deepens. The bank raised rates in July even though eurozone growth had already ground to halt, a move widely deemed to be a policy error.

Willem Buiter from Citigroup said the ECB must cut rates immediately to shore up Italy and Spain. "As long as they are willing to walk down the hill again as swiftly as they walked up it I don’t think any lasting damage was done. They have to change course," he told Reuters.

Jean-Claude Trichet, the ECB’s president, said the bank had been given a clear mandate by "the democracies of Europe" to hold inflation below 2pc and has stuck to its task. "We have delivered price stability, impeccably. I want to hear congratulations," he said in an emotional defence of the bank.

The ECB cut its growth forecast for next year to 1.6pc from 1.9pc, and to just 1.3pc in 2013, implying a long slump that will leave the eurozone’s weakest economies trapped in recession with crippling unemployment. The downgrade comes as the OECD club of rich states issued its own grim outlook, predicting that Germany’s economy would contract in the fourth quarter of this year.

Credit default swaps (CDS) on Greece have risen to record highs and two-year debt yields have reached 47pc as markets braced for the "endgame" of a long-running saga. "There is no threat of Greece exiting the eurozone," said Greek spokesman Ilias Mosialos, insisting that the country will deliver on key reforms.

The tough line on Greece reflects hardening opinion in northern Europe rather than egregious backsliding by the Greek government of George Papandreou, who inherited the current mess. Swingeing austerity has itself caused the economy to spiral downwards and miss targets. Output shrank at a 7.3pc rate in the second quarter of this year, a dire outcome after almost two years of recession. Barclays Capital said the budget deficit may remain stuck at 9pc this year.

The Greek parliament's own watchdog said the debt dynamic is "out of control". Public debt will reach 172pc of GDP next year. The policy of an IMF-style austerity package without the usual IMF cure of debt restructuring and devaluation appears to have tipped the economy into 1930s debt-deflation. The self-evident failure of the strategy makes it extremely hard for Mr Papandreou to secure democratic consent for further cuts.

Harvinder Sian from RBS said the sovereign humiliation of Greece by EU creditor states smacks of colonialism and can expect to meet fierce resistance. It may be tempting for Greece to precipitate a "hard default" before the second rescue package comes into force and switches a large stock of debt contracts from Greek law to English law, he said.

It is not clear who is in the stronger position in the latest round of brinkmanship between Greece and the German bloc. If pushed too far, Greece can set off a powderkeg. The International Monetary Fund says European banks are highly vulnerable and need to raise their capital by €200bn. Many of the weakest are in Germany.

The Greek crisis has spilled over into Cyprus, raising the risk that a fourth country will soon need an EU bail-out. The island’s finance minister Kikis Kazamias said he is mulling a request for help from the ECB after 10-year Cypriot bonds rose above 13pc. "We do not have the luxury of being choosy about who is going to lend to us," he said.

While Cyprus is too small to be systemically important, its banking system is roughly nine times GDP with liabilities of €156bn, according to Fitch Ratings. This is equivalent to Iceland before it blew up. Cypriot banks have 40pc of their assets in Greece, and hold a significant chunks of Greek debt.

The ECB is facing brushfires across a string of countries. Traders say it intervened yet again on Thursday to stabilize Italy’s debt markets, acting to prevent spreads over German Bunds nearing the danger level of 400 to 450 basis points where LCH Clearnet raises margin requirements. The bank has already accumulated more than €129bn of Greek, Irish, Portuguese, Spanish and Italian debt. It may be near its political limits within a few more weeks, given open protest from Germany’s Bundesbank.

The ECB is buying the bonds on an understanding that Europe’s €440bn bail-out fund (ESFS) will take over the task once its revamped powers are ratified by all parliaments, which could drag on until next year. Barclays Capital said Italy and Spain have already slipped back into industrial recession, ratcheting up the pressure. The question is what will happen if the global economy fails to stabilize quickly.

Italy faces €62bn of debt redemption this month, and €170bn by the end of December. The ECB’s ordeal by fire may yet be ahead.

The top German official at the European Central Bank resigned unexpectedly on Friday in conflict with the bank's policy of buying government bonds to combat the euro zone's debt crisis. The ECB confirmed Executive Board Member Juergen Stark, the central bank's chief economist, would leave "for personal reasons" by the end of the year once a replacement was found, after Reuters reported exclusively that he had quit.

The euro fell and shares tumbled in Europe and on Wall Street on the shock development, which laid bare a rift inside the central bank over the handling of the worsening debt crisis, and could undermine German public support for the euro. While Stark gave no public explanation for his resignation, he sent an article to German financial daily Handelsblatt for publication next Monday in which he said the only solution to the debt crisis was for governments to cut spending.

ECB bond-buying stemmed market contagion to Italy and Spain that threatened to overwhelm the euro zone's defences in August, giving governments a breathing space to work on policy solutions to the worst crisis in the single currency's history. The hawkish Stark's departure, almost three years before his term is due to expire in May 2014, may deepen the gulf between the ECB and German guardians of central banking orthodoxy.

In Marseille for a G7 meeting, German Finance Minister Wolfgang Schaeuble said he regretted Stark's decision but he expected another German, just as committed to stability policies, would take his ECB seat. A German government source said Stark had told the ECB board on Thursday of his intention to go and notified the German Finance Ministry, yet the news appeared to cause stress in Schaeuble's delegation on Friday.

A source familiar with the matter said Schaeuble's deputy, Joerg Asmussen, a pragmatic civil servant who has been at the heart of financial crisis management, would be nominated to replace Stark on the ECB's executive board. Former Bundesbank President Axel Weber, who had been the frontrunner to succeed ECB President Jean-Claude Trichet when he retires at the end of next month, resigned and withdrew from the race in February in protest at the same policy, which critics see as improperly monetising government debt.

"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president," said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Bundesbank chief Jens Weidmann. "It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."

Some economists said it was a sign that the hardliners were in retreat and the ECB was becoming more dovish. "The last hawk is leaving the sinking ship," ING analyst Carsten Brzeski said. Trichet made an emotional defence of the bank's performance against German criticism at a news conference on Thursday, his voice quivering with anger as he declared that the ECB's record of inflation fighting in Germany over the last 12 years had been better than the Bundesbank's.

Stark was one of four members of the ECB's policymaking governing council who sources said voted against last month's controversial decision to revive the dormant bond-buying programme and start buying Italian and Spanish debt after the two countries' borrowing costs ballooned. Since then the ECB has bought 56 billion euros in bonds, significantly reducing Italian and Spanish spreads over benchmark German Bunds, on top of the 76 billion euros in Greek, Irish and Portuguese bonds it had bought since May 2010.

Stark's decision means Trichet's designated successor, Bank of Italy governor Mario Draghi, will start his eight-year term in November with a mountain to climb to restore the central bank's credibility in Germany, Europe's biggest economy. While most policymakers, including Draghi, declined comment, Austrian ECB governing council member Ewald Nowotny, a policy dove, said the ECB's basic direction would not be affected by Stark's departure.

Uncertainty Over GreeceGerman Chancellor Angela Merkel said Stark stood for a "culture of stability" in the euro zone to which her government strongly adhered. Two days after the German constitutional court upheld the legality of euro zone bailouts so far, she said the European Union would have to enact treaty changes to strengthen cooperation in the debt crisis. The news added to uncertainty over the position of Greece, the country where the euro debt crisis began in late 2009.

A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance on Friday with expectations of take-up by private creditors fluctuating amid fierce European pressure on Athens. Banks and insurers were due to indicate whether they intend to join the bond exchange, part of a planned second international bailout package agreed in July which is in doubt due to Greece's failure to meet its fiscal targets.

Officials expect a take-up rate of above 70 percent but well short of the 90 percent target, which would see 135 billion euros ($189 billion) of Greek bonds maturing by 2020 swapped or rolled over in a global transaction. The head of the Greek public debt management agency said responses had started coming in and looked positive. But he said no figure would be given on Friday or next week.

Greece had threatened to cancel the deal unless it got 90 percent participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance. Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.

Markets are worried not only about the debt swap but also over an impasse in Athens' negotiations with the European Union and the International Monetary Fund, and the wider impact of the euro zone debt crisis for banks' solvency. IMF Managing Director Christine Lagarde renewed her call to European countries to take urgent action to recapitalise banks at risk from their sovereign debt exposure.

Speaking before the G7 meeting, Lagarde said: "We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity." EU officials have publicly brushed off Lagarde's call and dispute the IMF's estimates of banks' capital needs.

Speaking after the G7 meeting, ECB board member Christian Noyer acknowledged there was extreme tension in capital markets towards all European banks but said Greek debt did not represent a threat to any bank outside Greece. EU and IMF inspectors suspended talks and went home last week after Greece admitted this year's budget deficit would be well above the target set in its first 110 billion euro rescue programme and failed to present a draft 2012 budget.

European partners have since heaped pressure on Athens, warning it will not get the next 8 billion euro tranche of loans due this month if it does not improve fiscal discipline. Some senior politicians in Germany, the Netherlands and Finland have suggested Greece may have to leave the euro zone and governments in northern Europe are under pressure from public opinion angry at euro zone bailouts.

An opinion poll released on Friday showed three-quarters of German voters oppose the expansion of Europe's bailout fund, which parliament is due to approve this month, and half rated Berlin's handling of the crisis as "poor".

German deputy finance minister Joerg Asmussen could be proposed as early as Saturday as a replacement for Juergen Stark on the European Central Bank's executive board, with the backing of senior EU officials.

Asmussen will be at a 2 p.m. (8 a.m. ET) news conference with German Finance Minister Wolfgang Schaeuble on the sidelines of Group of Eight talks in the French Mediterranean port of Marseille, with Stark's replacement the big issue of the day. Sources told Reuters on Friday that Asmussen could be named to replace Stark -- whose resignation revealed a deep split at the ECB over its bond-buying activities -- a choice that looked set to win strong support among euro zone officials.

Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, said Asmussen would be an excellent choice for the ECB board. "The German government will make a proposal in the course of today or tomorrow. In the case that it is Asmussen it would be a very good decision," Juncker told reporters in Marseille. "The euro cannot be saved by one person but he would be without a doubt the right person."

Asmussen, who has been a key figure in Germany's policy response to the euro zone debt crisis, declined to comment to reporters as he left his hotel in Marseille earlier on Saturday morning. G8 finance officials met a day after Group of Seven finance chiefs in Marseille pledged a coordinated response to the faltering global economic recovery but offered few specifics to appease shaky financial markets.

A respected economist who studied under former Bundesbank chief Axel Weber, Asmussen has moved rapidly up the career ladder at the German finance ministry, moving from junior advisor in 1996 to deputy finance minister just 12 years later. His possible nomination by Germany would have to be discussed with Juncker and other Eurogroup colleagues before it could be approved.

A euro zone central bank source said on Friday that Stark was angry at being passed over when Weber quit the German central bank earlier this year, clearly also unhappy with the ECB bond-buying programme. The ECB has faced sharp criticism in Germany for buying bonds -- a move many here see as taking the bank into the fiscal arena and threatening its core role of fighting inflation.

Germans expressed shock and fear about the direction of euro zone policy on Saturday after their top official at the European Central Bank resigned over a conflict over the bank's response to the debt crisis.

The resignation of ECB chief economist Juergen Stark, a member of Angela Merkel's conservatives, is also a major blow to the Chancellor who has been deserted by several top allies and this month faces a vote on expanding the euro zone bailout fund which could even cost her job. "The end of the ECB as we knew it," a headline in the Financial Times Deutschland stated baldly. "Now it is over once and for all. The phase in the history of the ECB which was moulded by the Bundesbank," wrote commentator Wolfgang Proissl.

Germans, whose sacred Bundesbank was a model for the ECB and whose strong economy has underpinned the euro zone since it was created, fear they have lost the argument for stability to southern nations, who they view as financially irresponsible. Those fears have been compounded by the fact Frenchman Jean-Claude Trichet will be replaced at the helm of the ECB by an Italian, Mario Draghi, in November.

Above all, there has been anger about the ECB's decision to buy Greek, Portuguese, Irish and now Italian and Spanish bonds to help tackle the debt crisis, a move Merkel tacitly approved of. That was the main reason Stark, known as a hawk at the ECB, quit, sources said. Former Bundesbank President Axel Weber, who had been front runner to succeed Trichet at the ECB, resigned in protest at the same policy in February.

"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president," said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Bundesbank chief Jens Weidmann. "It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."

Germans fear the policy is part of a move to a "transfer union" and goes against the original treaty which forbids euro zone states from taking on the debts of other members. In a visceral comment in the Frankfurter Allgemeine Zeitung, Holger Stelzner described the "sad evolution of monetary policy" and accused the ECB of acting on bond markets to save failed governments and Italy, which refused to cut spending.

"By buying government bonds, the ECB was itself helping to turn monetary union into a debt community with unlimited liability," he wrote. He also described the hardening of northern and southern camps in the ECB and accused southern states of "switching on the printing presses to iron out the shortcomings of fiscal policy." In a reflection of just how worried Germans are about that policy and the euro zone crisis in general, even German President Christian Wulff last month criticised the ECB's bond buying policy -- a highly unusual foray into financial policy.

A poll for broadcaster ZDF this week showed that 76 percent of Germans opposed granting any further aid to Greece. All this could be very dangerous for Merkel. Some commentators believe Stark's move will embolden rebels in Sept. 29's vote on the European Financial Stability Facility (EFSF).

Although Merkel will win the vote because opposition parties support the planned law, her authority would be badly damaged if she fails to secure a majority from within her own centre-right coalition and she may be forced to call elections. Bild newspaper said former Bundesbanker Edgar Meister had attacked Merkel's government for failing to give Stark sufficient support -- echoes of criticism she faced after Weber's resignation.

With the government's lawsuits last week against 17 big banks, we can now say we've seen it all. The suits attempt to argue that Fannie Mae and Freddie Mac, the government-created mortgage giants at the center of the financial crisis, were in fact unwitting victims.

One has to laugh or cry examining the complaints drafted by Fan and Fred's regulator, the Federal Housing Finance Agency (FHFA). As the conservator for the two mortgage monsters since their federal rescue in 2008, the FHFA is suing most of the financial industry on grounds that banks misrepresented to Fan and Fred the quality of loans inside mortgage-backed securities bought by the two firms during the housing boom. Yes, Fannie Mae and Freddie Mac are now shocked, shocked to discover they were buying low-quality mortgages during the housing mania.

We know that FHFA Acting Director Edward DeMarco has a mission to protect the taxpayers who have bailed out Fannie and Freddie with $171 billion and counting. It's also true that Mr. DeMarco deserves taxpayer gratitude for his efforts to resist additional housing bailouts. But when examining the new bank lawsuits, it's worth remembering that an attorney doesn't have an obligation to sue everyone with whom his client has ever done business. And taxpayers may wonder if they'll really be better off after Washington attempts this cashectomy on a still-weak banking system.

Any cash would have to come from a settlement, because we can't imagine the feds bringing these cases into a courtroom. At that point the FHFA's attempt to cast Fan and Fred as victims might have to be reconciled with a voluminous FHFA paper trail blaming Fan and Fred for "unsafe and unsound practices," "imprudent decisions" to "purchase or guarantee higher risk mortgage products," and its determination to take on more risk despite internal and external warnings.

Even the report of the Financial Crisis Inquiry Commission, whose Democratic majority tried to minimize government's role in the meltdown, acknowledged the Fan and Fred mess. Its final report quoted an FHFA examiner who observed that Fannie was "the worst-run financial institution" he'd seen in 30 years as a regulator. The common theme in the new lawsuits is that banks misled Fan and Fred about how many of the loans inside the mortgage pools were going to owner-occupants versus speculators, and how high the ratio was of the value of a loan to the value of the property.

Many of these securities included dodgy subprime and "Alt-A" loans, meaning the borrowers had low credit scores or provided little or no documentation to back up their claims. But Fan and Fred thought that by buying the triple-A tranche of these securities they would be the last ones stuck with the losses. The toxic twins were happy to enjoy the high yields while also fulfilling their federal affordable-housing mandates, even as they warned in securities filings that they were taking on more risk.

So to sum up the argument made by the FHFA: Fan and Fred were duped by banks because the two mortgage giants thought they were buying pools that included very risky mortgages, when in fact they included insanely risky mortgages.

Several of the bank defendants say that on their deals Fan and Fred could have studied the "loan tape," with detailed information on mortgage borrowers, if they had cared enough to make their own judgments on risk. On the question of property values, the government fed publicly available data into a computer model and decided that the properties were valued too highly during the real-estate bubble. No kidding.

But if there were fraudulent appraisals at the time, this would suggest a lawsuit against appraisers, unless one is simply looking for the deepest shareholder pockets. In any case, why didn't Fan and Fred use such a model before deciding to buy?

On the question of occupancy, if a buyer falsely claimed that he would occupy a given property, why is the bank any more liable than Fan and Fred are? The two mortgage giants had already agreed to buy pools of loans with little or no documentation of the borrowers' claims. Why? Because Fan and Fred's well-paid management and boards were enjoying the ride, and they knew that taxpayers would be there to pay the bill when it ended.

To be clear, not all of the loans went bad, and some of the securities mentioned in the suits are still paying on time and in full. So exactly how much harm are Fan and Fred alleged to have suffered at the hands of banks? FHFA won't say. These look like lawsuits with a premise to be named later.

After a tumultuous August, pension funds for companies, governments and unions are falling further under water, raising pressure on boards to take on more risk at a time when the economic and policy outlook has never been more uncertain.

Entering 2011, pension plans for companies in the S&P 500 were just 75 percent funded, down from 85 percent in 2010 and roughly 78 percent following the Lehman collapse, according to Goldman Sachs. Funding levels—likely even uglier on a municipal and union level—just got worse.

"The recent fall in equity prices and in interest rates has led to sharp declines in the funding position of many institutional investors," wrote Jim O’Neill, head of Goldman Sachs Asset Management, in a note to clients Thursday. "Recent market movements have left many institutional investors wary of taking risk, but at the same time mindful of the necessity of doing so in a thoughtful way."

After a volatile August that ultimately brought the S&P 500 into negative territory for the year, September kicked off with its worst 3-day start post WWII. Meanwhile, the 10-year Treasury yield is trading at a lowly 2 percent.

Stocks added to losses Thursday as Federal Reserve Chairman Ben Bernanke failed in a speech to hint at the specific stimulus he will use to fight the next stage of this struggling recovery. Pessimism that any proposals from President Obama will be voted down by Republicans added to the drop and cloudy outlook.

"While market volatility is, in our view, likely to stay elevated in the near term, we remain reasonably constructive on the global economy, particularly on the outlook for growth and emerging markets," said the note, citing favorable demographics and rising productivity.

Pension fund managers face the difficult choice between taking this advice at a time when conditions seem the most dangerous and staying conservative as these strategies begin to pay off over the long term.

At some point, especially with percentage of the population over 65 years old expected to double in the next 20 years, the funds will be forced to drop their annual return assumptions – typically above 8 percent – upon which their future obligations are calculated. Companies and states are reluctant to do that though because that means an immediate hit to their bottom line. The other choice is cut the benefits side.

Many funds are turning to hedge funds to generate the returns for them in this tumultuous environment. "Most pension funds should already be in commodities and emerging markets and deploying options strategies," said Damon Krytzer, a trustee for the San Jose Police and Fire retirement plan and a managing director at Waverly Advisors. "The problem is many are behind the times."

Krytzer, Goldman and others are not necessarily advising funds "trade their way out" of the funding hole. Instead, they are just advising the funds to get positioned for a long period for this nation of slow growth and low rates where alternative and global strategies work best. But it’s just a tough sell to traditionally conservative pension boards. Especially when emerging markets, based on the iShares MSCI Emerging Markets ETF, plunged more than 11 percent in August alone.

The harm today’s youth unemployment is doing will be felt for decades, both by those affected and by society at large

Maria Gil Ulldemolins is a smart, confident young woman. She has one degree from Britain and is about to conclude another in her native Spain. And she feels that she has no future. Ms Ulldemolins belongs to a generation of young Spaniards who feel that the implicit contract they accepted with their country—work hard, and you can have a better life than your parents—has been broken. Before the financial crisis Spanish unemployment, a perennial problem, was pushed down by credit-fuelled growth and a prolonged construction boom: in 2007 it was just 8%. Today it is 21.2%, and among the young a staggering 46.2%. "I trained for a world that doesn’t exist," says Ms Ulldemolins.

Spain’s figures are particularly horrendous. But youth unemployment is rising perniciously across much of the developed world. It can seem like something of a side show; the young often have parents to fall back on; they can stay in education longer; they are not on the scrapheap for life. They have no families to support nor dire need of the medical insurance older workers may lose when they lose their jobs. But there is a wealth of evidence to suggest that youth unemployment does lasting damage.

In the past five years youth unemployment has risen in most countries in the OECD, a rich-country club (see chart 1). One in five under-25s in the European Union labour force is unemployed, with the figures particularly dire in the south. In America just over 18% of under-25s are jobless; young blacks, who make up 15% of the cohort, suffer a rate of 31%, rising to 44% among those without a high-school diploma (the figure for whites is 24%). Other countries, such as Switzerland, the Netherlands and Mexico, have youth unemployment rates below 10%: but they are rising.

The costs mount upIn tough times young people are often the first to lose out. They are relatively inexperienced and low-skilled, and in many countries they are easier to fire than their elders. This all goes to make them obvious targets for employers seeking savings, though their low pay can redress things a little. In much of the OECD youth-unemployment rates are about twice those for the population as a whole. Britain, Italy, Norway and New Zealand all exceed ratios of three to one; in Sweden the unemployment rate among 15- to 24-year-olds is 4.1 times higher than that of workers aged between 25 and 54.

Not only is the number of underemployed 15- to 24-year-olds in the OECD higher than at any time since the organisation began collecting data in 1976. The number of young people in the rich world who have given up looking for work is at a record high too. Poor growth, widespread austerity programmes and the winding up of job-creating stimulus measures threaten further unemployment overall. The young jobless often get a particular bounce in recoveries: first out, they are often also first back in.

But the lack of a sharp upturn means such partial recompense has not been forthcoming this time round. In America the jobs recovery since 2007 has been nearly twice as slow as in the recession of the early 1980s, the next-worst in recent decades—and from a worse starting-point. In some countries a rigging of the labour market in favour of incumbents and against the young makes what new jobs there are inaccessible.

Youth unemployment has direct costs in much the same way all unemployment does: increased benefit payments; lost income-tax revenues; wasted capacity. In Britain a report by the London School of Economics (LSE), the Royal Bank of Scotland and the Prince’s Trust puts the cost of the country’s 744,000 unemployed youngsters at £155m ($247m) a week in benefits and lost productivity.

Some indirect costs of unemployment, though, seem to be amplified when the jobless are young. One is emigration: ambitious young people facing bleak prospects at home often seek opportunities elsewhere more readily than older people with dependent families. In Portugal, where the youth unemployment rate stands at 27%, some 40% of 18- to 30-year-olds say they would consider emigrating for employment reasons.

In some countries, such as Italy, a constant brain-drain is one more depressing symptom of a stagnant economy. In Ireland, where discouragement among young workers has shot up since 2005 (see chart 2), migration doubled over the same period, with most of the departed between 20 and 35. This return of a problem the "Celtic tiger" once thought it had left behind is treated as a national tragedy.

It’s personalAnother cost is crime. Attempts to blame England’s recent riots on youth unemployment were overhasty. But to say there is no link to crime more generally looks unduly optimistic. Young men are already more likely to break the law than most; having more free time, more motive and less to lose hardly discourages them. Some researchers claim to have identified a causal link between increased youth unemployment and increases in crime, specifically property crime (robbery, burglary, car theft and damage) and drug offences. No such link is seen for overall unemployment. If the crime leads to prison, future employment prospects fall off a cliff.

And then there are the effects on individuals. Young people are hit particularly hard by the economic and emotional effects of unemployment, says Jonathan Wadsworth, a labour economist at the LSE. The best predictor of future unemployment, research shows, is previous unemployment. In Britain a young person who spends just three months out of work before the age of 23 will on average spend an additional 1.3 months in unemployment between the ages of 28 and 33 compared with someone without the spell of youth joblessness. A second stint of joblessness makes things worse.

Research from the United States and Britain has found that youth unemployment leaves a "wage scar" that can persist into middle age. The longer the period of unemployment, the bigger the effect. Take two men with the same education, literacy and numeracy scores, places of residence, parents’ education and IQ. If one of them spends a year unemployed before the age of 23, ten years later he can expect to earn 23% less than the other. For women the gap is 16%.

The penalty persists, though it shrinks; at 42 it is 12% for women and 15% for men. So far, the current crisis has not led to these long-term periods of youth unemployment rising very much; almost 80% of young people in the OECD who become unemployed are back in work within a year. But that could well change.

The scarring effects are not necessarily restricted to the people who are actually unemployed. An American study shows that young people graduating from college and entering the labour market during the deep recessions of the early 1980s suffered long-term wage scarring. Graduates in unlucky cohorts suffer a wage decline of 6-7% for each percentage-point increase in the overall unemployment rate. The effect diminishes over time, but is still statistically significant 15 years later.

After a period of unemployment, the temptation to take any work at all can be strong. Wage scarring is one of the reasons to think this has lasting effects, and policies designed to minimise youth unemployment may sometimes exacerbate them. Spain, which has developed a scheme for rolling over temporary contracts to provide at least some chances of employment to the young, should pay heed to the experience of Japan in the early 2000s.

Young people unemployed for a long time were channelled into "non-regular" jobs where pay was low and opportunities for training and career progression few. Employers seeking new recruits for quality jobs generally preferred fresh graduates (of school or university) over the unemployed or underemployed, leaving a cohort of people with declining long-term job and wage prospects: "youth left behind", in the words of a recent OECD report. Japan’s "lost decade" workers make up a disproportionate share of depression and stress cases reported by employers.

Unemployment of all sorts is linked with a level of unhappiness that cannot simply be explained by low income. It is also linked to lower life expectancy, higher chances of a heart attack in later life, and suicide. A study of Pennsylvania workers who lost jobs in the 1970s and 1980s found that the effect of unemployment on life expectancy is greater for young workers than for old. Workers who joined the American labour force during the Great Depression suffered from a persistent lack of confidence and ambition for decades.

There are other social effects, too, such as "full-nest syndrome". In 2008, 46% of 18- to 34-year-olds in the European Union lived with at least one parent; in most countries the stay-at-homes were more likely to be unemployed than those who had moved out. The effect is particularly notable in the countries of southern Europe, where unemployment is high and declining fertility means small families: a recent study by CGIL, an Italian trade-union federation, found that more than 7m Italians aged between 18 and 35 were still living with their parents. Since 2001 one in four British men in their 20s, and one in six women, have "boomeranged" home for a period. This sort of change will, for good or ill, ripple on down the generations which may, if young people live longer and longer at home, become more spread out.

In lieu of jobsIn some countries, particularly in southern Europe, the main focus for governments should be on opening up labour markets that lock out younger workers In countries with more flexible labour markets, the emphasis tends to be on "skilling up" young people. This is not a panacea.

Universities can be a source of skills and a place to sit out the doldrums, so students are entering and staying on at university more and more. American graduate schools have received at least 20% more applications since 2008. But as they build up debts, not all these students will be improving their job prospects. Having a university degree still increases the chances of employment, but joblessness among college graduates in America is the highest it has been since 1970.

There are dangers in vocational training, too. The Wolf report, a review of vocational education in Britain published this year, pointed out that the wrong kind of training can actually damage employment prospects. It found that almost a third of 16- to 19-year-olds in Britain are enrolled in low-level vocational courses that have little or no labour-market value. Research indicates that taking a year or two to complete schemes of this sort reduces lifetime earnings unless the schemes are combined with employer-based apprenticeships.

In Germany, seen by many as a model in this regard, a quarter of employers provide formal apprenticeship schemes and nearly two-thirds of schoolchildren undertake apprenticeships. Students in vocational schools spend around three days a week as part-time salaried apprentices of companies for two to four years. The cost is shared by the company and the government, and it is common for apprenticeships to turn into jobs at the end of the training. The youth-unemployment rate in Germany, at 9.5%, is one of the lowest in the EU. Apprentice-style approaches practised in the Netherlands and Austria have had similar results.

Germany’s export-driven economy, with its army of specialised manufacturers, may be particularly suited to the apprenticeship model. It is not obvious how easily it could be imported into more service-oriented economies. America, for example, lacks the institutions—strong unions, compliant management and a hands-on government—that have made the German model so successful.

Such programmes would also have to overcome cultural obstacles. Bill Clinton’s school-to-work initiative, a nod to the apprenticeship system, was derided as second-rate education. Even in the skilled trades where apprenticeships have caught on, the model has suffered because of the collapse of the construction industry. Britain, though, seems willing to give it a whirl. Last year 257,000 positions were created.

Yet this may be of little use to the hardest-to-reach under-25s, who often come from backgrounds where worklessness is the norm and the lack of adult role models creates aspiration gaps at an early age. "Targeted programmes with one-on-one attention are what these young people need," believes Paul Brown, a director of the Prince’s Trust. "Policies aimed at all young people will only make the neediest fall through the cracks."

43 comments:

Greece looks for growth and will find it in its black markets. The euro will be a hot property and the 'new' drachma will be re-inflated over and over into nothingness. At the end of the day: fuel will cost the equivalent of $40 a gallon in Greece, which is what it should have cost years- if not decades ago, before Greece ever heard of 'euros' ...

or BMWs or 'Jet Holidays'. All of these are gone (except for gangsters and the well-connected).

Black markets and hyperinflation: the Greeks will never escape the euro unless they dollarize their economy.

Looking for growth in Spain and seeing outrage. How can forty percent of Spanish young people out of work not be outraged? Look for gas prices above $40 dollars per gallon in Spain as well. It has nothing to trade to Iran or KSA but the peseta won't hyperinflate. Why? Unemployed cannot afford cars, much less expensive fuel.

Ireland will simply hang on for dear life as fuel costs will skyrocket to -- you guessed it -- $40 per gallon and cars are sold for weight scrappage. All those expensive motorways built to connect the vacant boxes to other vacant and rotting boxes. Somebody should be put up and shot but whom? An American? Probably but Elvis is already dead.

Germany go broke? How can it? Simple, its economy orbits around the automobile, which is becoming too expensive for anyone other than millionaires to operate. Hello, peak oil! Since it happened (on a dollar basis) in 1998, there have been years to get ready, right?

When the export business dies and the car factories close what next? Messerchmitts and Focke Wulfs? Don't they run on gasoline, too?

Germany can get into the pawn shop and fuel resale business but they'll have to compete with the Greeks. Paybacks are hell, right? Since nobody can afford the cars the market for fuel is also going to die ...

"Germany is preparing a plan to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt, three members of Chancellor Angela Merkel’s coalition said yesterday."

All these one liners about Frau Doktor Merkel shoring up German banks, but no substance. They preparing sandbags, a TARP, or both? Will Hank Paulson make a cameo appearance in behalf of the Frau Doktor? Get down on his knees in front of the Bundestag? Will Herr Ackermann commit Seppuku on national television to atone for his sins?

Eurozone blamed by US for world's economic plighthttp://www.telegraph.co.uk/finance/financialcrisis/8754670/Eurozone-blamed-by-US-for-worlds-economic-plight.html

"Seventy-five per cent of the dark things happening in the world economy are because of the euro zone," said a senior US official after a round of talks ended in the early hours of yesterday morning.The beautiful surroundings of the 19th century

Palais du Pharo, overlooking the old port of Marseille, did nothing to soothe America's growing anger at the euro zone's inability over recent weeks to take the steps needed to prevent a full blown global economic crisis.

"It was the principal cause of the slowdown we had last summer, and it's been a significant cause of the slowdown we've had this summer," said Timothy Geithner, the US Treasury Secretary.

Who's ready for the fall? I am as I accept I'll be amongst the first to fall off the back of the bus.Maybe Starcade will go first and break my fall:)As Ilargi said," Damn the women and children." Especially old ladies long on system dependency,short on assets. I've done my best to clean up the waste and confront false desires. Won't be enough though without some luck. Ce'est la vie...

Makes me think of the greater part of a year I spent living among first generation literate Kikuyu girls. As experienced observers (peace corps workers, missionaries, teachers, etc.) noted, it takes about three generations for people to go from an agrarian crop-cycle manner of thinking to full-blown abstraction ("if I vary a, I will experience the new result of b").

It could be both comical and maddening to deal with at times. One never knows how much baggage we carry in our minds, born as we are in a highly abstract society, until pitted against such a situation. That too is comical. I thought they were all going to be upset because I was privileged and had appliances, schooled as I was in the egalitarian glow of the 60's. Instead I found out what a lot of people of race are about to find out stateside, that they were much more concerned with their own tribal skirmishes and peeves. They didn't see color as an issue and felt no greater allegiance to "their own" in our abstract terms.

What has happened is that TPTB are much more able to make human activity into a form of currency by pushing them into an urban zone. That way, activities can be defined on a spreadsheet and hypothecated. Which may mean that somewhere up in the misty peaks of the economic foodchain, a bunch of us ants discussing the value of currency must be humorous. At some level, perhaps we humans are the real currency.

Soon to be devalued, as has been observed.

And this is where psychopathy gets full blown, not to be compared with intertribal butcheries of old.

Infrastructure spending as panacea? As in, issue shovels, with which to dig holes then fill them in? Why, if that could save us from calamity, imagine the prosperity we could "create" by issuing these new laborers spoons with which to dig instead!

Re; "Who's prepared to fall," a comment made by my grandfather many years ago, when I asked how he fared in Central Montana on the Homestead during the Great Depression, " Never had any money before 1929, didn't see any difference," was his response. Guess it's all relative.

My opinion is, those who were flying the highest will fall the hardest. Those of us with tools and knowledge of their use will most likely manage in what I foresee as a new barter system which will quickly spring up as substitute to a grossly mismanaged "official" one. Kuntsler's "World Made by Hand" concept might be a kind of template for the future of "socioeconomics."

When the going gets tough, the tough get going. Been that way forever, no?

My wife had an Irish single-mother patient. This lady came to Australia to train as a hairdresser - which should have given her immigration rights. After 2 years of training - and spending money - they changed the law and now she has to go back to Ireland. Very sad.

Ash said...Who's ready for the fall? . . . Who's ready for The Solution; the break-neck speed of collapse and the revolution?

+1

Just back from Fiji. A glimpse of the western world in a decade? 95% poverty, with a few gated communities (in this case for tourists).

Those who live in the towns and little villages have been tricked into ditching many traditional self-sufficient methods of survival for "modern" alternatives that in some cases are inferior, and cost them money and their independence to boot.

Then there are gated fantasy lands. In Fiji these squeeze tourist money, of course, making a few international companies and small business owners wealthy, whilst the native Fijians and majority of the Indian Fijians struggle to get a slice of the profit.

The illusion of modernity is strong. It will be a long while before it is broken in the Western world.

Jack Bogle Interview with Jason Zweig:Jack Bogle Vanguard WisdomBuying and holding stocks and bonds for the long term and maintaining a diversified portfolio are still the smartest strategies for the average investor, says Vanguard founder Jack Bogle.-------------------------

Roubini was right about 2008 but I seem to recall that he's been dead wrong since then. The markets are primed with horrible news day after day that just a shred of good news COULD send equity prices soaring. A risk that HE is taking (by not being IN the market).--------------------------

stocks, for example, would not be speculative and still provide a "fundamental return." They are an ownership claim to companies that are valued in terms of dollars, but they are not actually dollars. Also, to address your point directly, stock dividends are determined by the product or service produced, so something tangible underlies them, even though paid in dollars. The same would apply to rents of rental properties and productive farm land.

In an inflationary period it would at least be possible for the nominal dollars paid out to increase at an acceptable pace so as to still match the real value of the service or product provided by the company, farm land or rental unit. So stocks, ag. land, and rental property and their "returns" are not speculative in nature, as is the case, in my opinion, with bonds and interest paid on them.

I'm betting on Eurobonds bailing out Greece. Yes, I know you all say it's impossible. Politically. But I think the gun is to their heads, and they will throw their own people under the bus to save their own skin. It will mean the people of Europe only have one choice, and that is armed insurrection. I just don't think Europeans are ready to do that. Some rowdy parades isn't the same thing as truly storming the Bastille. I would bet today Greek default is still a year or more away. Sounds impossible with those bond rates. But I think there are more rabbits to pull out of the hat--the powers that be are DESPERATE! They will stop at nothing.

It has that patina of Resposibility -- Sober and Serious Investing for grown-ups. And yet it'll end in tears. The dynamic of the forum should be very interesting to witness in the days and months ahead. As the impossible dream dies, how long will the true believers hold-out?

The PHilosophY:

In summary, a Bogleheads investor tends to save a lot, selects an asset allocation containing both stock and bond asset classes, buys low cost, widely diversified funds, allocates funds tax efficiently, and stays the course. One of the wonderful things about Bogleheads investing is that it generally only requires a part of a day to set up, and then about an hour a year of effort to rebalance. Beyond that, there is no need to watch the markets or follow financial news. Even better, it works. Although Bogleheads investing may seem strangely simple, it is based on decades of comprehensive research showing that buying and holding the whole market consistently outperforms the alternatives.

By RON LIEBERPublished: September 12, 2008It’s pretty hard to stick with a long-term plan for your money when the financial world seems to be unraveling around you. You were probably already uneasy about home prices, job stability and inflation. Then the government took over Fannie Mae and Freddie Mac, Lehman Brothers scrambled for a buyer and the stock of Washington Mutual fell below $3 amid concerns about its own shaky standing — and that’s just in the last week. The temptation is to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever.

“The big question that people ask during these things: ‘Is it different this time?’ ” says J. Mark Joseph, of Sentinel Wealth Management in Reston, Va.

Has the still Chief Personal Finance Writer at the Times learned anything in 3 years? Does he still regret his gem from Sept. 2008?

Let's check and see:

YOUR MONEYAll the Ways That Stocks Churn Your Stomach

By RON LIEBERPublished: August 12, 2011

If the stock market is a reflection of the stew of our emotions, it’s pretty clear that nobody knew how to feel this week......The default advice at times like these is to remain calm. But I’d be lying if I didn’t admit that I was also grappling with every emotion along the fight-flight-freeze continuum. The most harrowing feeling is the sense of déjà vu, given the rumors of trouble in European banks and various efforts to ban short-selling. It all feels too much like the fall of 2008, and nobody wants to go back to the way they felt in the year after the collapse of Lehman Brothers.

So like you, I imagine, I wanted to buy, and I wanted to sell, sometimes on the same day. And I felt rage toward various authority figures. Another recession is a real possibility. And government debt isn’t just having its own impact on stocks worldwide; it’s wreaking havoc on our confidence in our country and our basic sense of security.

These emotions aren’t particularly constructive in the long term, since they can be paralyzing or lead us to make hair-trigger decisions. And if we don’t stop to confront and untangle these feelings, they can easily lead us astray........

My plan is to put more money away, when I can, in savings accounts that are shielded from taxes or free from them entirely, like 529 college savings plans and Roth individual retirement accounts

The late great Chalmers Johnson (a scholar who was more articulate than Chomsky) said it best:

(Re: Reading or watching the media today) ...."It's quite litterally like listening to Pravda. No one in the Soviet Union read Pravda to get the news. They read it to get the line. I no longer read the New York Times for the news, I read it for the line.Chalmers Johnson: A fascinating commentary

Someone is trying to discredit us by posting fraudulently as us.I haven't seen the comments as Ilargi has deleted them, but I have seen responses, so I have a vague idea.

It's a great shame that blogger allows multiple people to use the same identity. Someone demonstrated this to us a couple of years ago by posting as Dr J a whole lot of comments diametrically opposed to Dr J's position. He explained how easy it was.

TAE obviously has enemies who want to make life difficult for us. Please take any strange comments with a grain of salt, at least for the time being. We'll be extra vigilant in the meantime, and more comments than usual will dispear today.

Other identities might get stolen as well, so beware of oddities from any quarter.

Stoneleigh said: "It's a great shame that blogger allows multiple people to use the same identity."

For sure this is true. Two of us were signed in as Robert. I changed to Robert 1 to differentiate. Not that the other Robert was anything but an honest poster, just to keep our posts separate.

Well, as I said before, some sure think this site is too much spot on and want to destroy its credibility. Now I am more certain of it. It is all the more important to find another blog site that is more secure.